Abstract

In recent years companies issuing convertible bonds enter into some transactions simul-
taneously in order to mitigate some of the negative impacts of issuing convertible bonds
such as the dilution of existing shares. One of the popular concurrent transactions is a
call-spread overlay which is intended to reduce the dilution impact. This thesis explores
the motivation for using these combined transactions from the perspective of the issuers,
investors, and underwriters. We apply a binomial method to price the convertible bonds
with call-spread which are subject to default risk. Based on previous empirical studies
convertible bond issuers experience a drop in their stock price due to the activities of
convertible bond arbitrageurs when the issuance of convertible bonds is announced. We
propose a model to estimate the drop in the stock price due to convertible bond arbitrage
activities, at the time of planning the issue and designing the security that will be offered.
We examine the features of the model with simulated and real-world data.